YOUR MONEY | Mutual Funds

For Some Small-Cap Funds, Today's Market Makes a Shut-and-Open Case

Investors looking for any sign that the rout in U.S. small-company stocks is nearing an end may now have at least a small reason to take heart.

Four relatively successful small-cap mutual funds are reopening to new investors, their managers saying they want money to buy stocks that recent market declines have made dirt-cheap.

Since April, the Russell 2,000 index of smaller stocks--also a performance benchmark for small-cap funds--is down 30%, and since the beginning of the year it's down 22%. Long-term investors who aren't scared by those numbers--or by the possibility that things might very well get worse before they get better--may see a buying opportunity.

"I haven't seen so many buying opportunities since we started the fund three years ago," said Steven Reid, manager of the Oakmark Small Cap Fund, which has fallen 31.4% since April and is down 26.3% year to date. "It's not just stocks that are reporting earnings disappointments that are going down. Anything with a ticker symbol is going down these days."

The Oakmark fund closed its doors in June 1997 on concern the fund was getting too big to be managed effectively. That year and the year before, Oakmark Small Cap saw gains of 40%. By the time it closed last year, small-cap stocks generally were lagging the shares of big companies.

Wasatch Micro-Cap Fund and Wasatch Aggressive Equity Fund, run by Wasatch Advisors Inc., are two other small-cap funds that, as of Sept. 21, will reopen to new investors. Another is Heartland Value Fund, which Heartland Advisors Inc. is reopening Nov. 9.

All three of those funds have been suffering declines, however. The Wasatch Micro-Cap Fund has fallen 11.4% this year, and Wasatch Aggressive Equity is off 21.3%. Heartland Value is down 19.5%.

"We're value investors, and we haven't seen valuations so low in more than three years," said Eric Miller, co-manager of Heartland Value.

Miller and co-manager William Nasgovitz closed the fund about three years ago because the managers believed the market was getting fully valued. The fund's assets peaked earlier this year at the $2.4-billion level; today they're closer to $1.6 billion.

A cynical investor might surmise that fund companies are reopening closed funds because the decline in assets caused by the market slump is cutting into their management fees. Fund companies deny that's the reason.

"Ours is a stock market-related decision, not a business-related one," said James Milligan, marketing director of Salt Lake City-based Wasatch Advisors, which manages a total of about $1 billion of assets.

"If it was a marketing decision, I would have made it," Milligan said. "The decision was made by our portfolio managers, who wanted cash to buy stocks at lower levels. With a closed fund, there's almost no money around to buy stocks."

Milligan said the $108-million Wasatch Micro-Cap will reopen after a year of being shut to new investors and stay open until assets reach $150 million.

"We're talking about an extra $40 million of assets, which translates into profits of maybe $100,000," Milligan said. "It's not a lot of money for a firm that earns millions. In fact, it might cost the firm money because of all the paperwork tied to reopening a fund."

Heartland Value's Miller said that fund will only accept new investments of at least $25,000, in an effort to attract those investors who take a longer-term perspective.

Given the returns of even the best-performing funds in these categories in recent years, investors are not likely to pour money in.

"We're not expecting that a lot of cash will come in," Miller acknowledged. "We've been out of the limelight," as blue chips were making their stunning double-digit advances, "and our performance has been pedestrian."

With returns like these, managers of small-cap funds had better hope they're right about predicting a rebound.